“The trend is your friend.”
As market technicians, we hear this a lot. And then eventually, thankfully, we learn to follow it as well. But what if there is no trend? Then what?
Well, then you make new friends that go by the names Patience and Faith. Patience for when the trend resolves, and Faith in your abilities to identify that resolution.
Hello readers! Welcome to the revamped version of Technically Speaking. We’ve made several changes to the existing format based on the feedback we’ve received and we’re excited to share it with you. I am taking over the role of the Editor from Michael Kahn, who has been a fantastic Editor for the past three years! Thank you, Mike, for the content you curated diligently for so long.
As a study, technical analysis is extremely subjective, and once we factor in the emotions of the market participants and the market analysts, we have to ourselves a delightful mix of knowns and unknowns. The known is that human behavior continues to exhibit the same tendencies over time: Greed & Fear. The unknowns comprise the unique combinations that emerge from the coming together of distinct indicators, systems, trading styles, and perceptions. Put together, we have a beautiful place to go to, where every day is a new day and every day brings new opportunities. That is, if you are prepared to seize them.
2020 and 2021 have been quite distinct from one another. If 2020 was like bungee jumping, then 2021 has been more like ziplining. While 2020 rewarded those who had faith in the trend resolution, 2021 has been rewarding those who’ve exhibited patience. Regardless of both market scenarios, there have been plenty of lessons to be learned. Learn, we have, and will!
In the new format of this newsletter, we will present information in various forms that can be broadly categorized but not limited to the following:
- Market Recap
- Market Outlook
- Current Market
- Options Strategies
- Curriculum Application
- Book Reviews
- Market Mechanics
Members and non-members are invited to share their unique experiences and learnings so as to grow together as a community.
I’d like to take this moment to thank the CMT Association for giving me this opportunity. I have been a student of Journalism in the past, and to be an Editor of an International Newsletter is truly a dream scenario playing out for me. I started out with the India-specific Newsletter Technical Insights, and have had many learnings which I intend to put to good use now.
My goal is to make market insights more accessible to you from those who have had their fair share of experiences. At a time when the market environment is as vibrant as it is today, it could only help to learn from those who have experienced the cycle of fear & greed several times and more!
If there is anything else you’d like to see featured here, please reach out to me at email@example.com.
Here’s to a new journey. So onwards and upwards we go (into bullish momentum territory).
Until we meet again (in print), think technical!
President's Letterby Brett Villaume, CMT, CAIA
In this month’s President’s Letter, I am going to address the professional work requirement for membership in the CMT Association. Per the Bylaws, Article 2.01, Section (C), items (i) and (ii),...
Don't Ignore Classical Chart Patternsby Frank Cappelleri, CMT, CFA
Within the Technical Analysis (TA) world, new strategies from perceptive and curious practitioners routinely are being discovered, discussed and implemented. The space will continue to evolve, and...
How to Position for Rising Ratesby Steven Strazza, CPA
We have a resolution in one of the most important charts in the world. The US 10-year yield has reclaimed 1.40% and then some. So, what does a rising rate environment mean for investors? We know we...
US Dollar Index: A Comprehensive Analysisby Jigar Mehta, CMT & Rakesh Gandhi
DXY trend: Looking at the trend of the US Dollar index (DXY) is very important to gauge the movement of Bullions and Base Metals, as these have an inverse relationship to this trend. While Bullions...
Top Down, Bottom Upby Thomas Hayes
I was asked to write an article on how we use charts in our investment selection process from the perspective of a hedge fund manager. The answer is, a majority of analysis comprises of fundamental...
No One Wants Your Rocksby JC Parets, CMT
Imagine purposely choosing to own precious metals over the past year? This is where ego plays a huge role. Technical Analysis is not just the study of the behavior of the market, but also market...
Fill the Gap Podcast: Episode 10 Now Streamingby Tyler Wood
Can technical analysis complement value investing? Yes, indeed. Fundamental practitioners are often grouped into value or growth styles of investing, while within the technical community the...
Book Review: Technical Analysis of Stock Trends by Edwards & Mageeby Aksel Kibar, CMT
I started studying Technical Analysis back in 2000. My interest grew after the strong bull market of 1990s and the Tech bubble. At the time I was studying Economics, and the theory and real market...
Kagi Chartsby Bhagyashree Urdhwareshe, CMT
Kagi charting is an old charting method developed by the Japanese rice traders around 1870, to visualize the price movement and supply demand levels for rice and other commodities. They resemble old...
Will Value Have the Last Laugh of 2021?by Ian McMillan, CMT
After a great second half of the year for stocks in 2020, equities and other risk-on assets were quite strong heading into 2021. However, since March, there have been massive swings of leadership...
Job Openingsby Marianna Tessello
Three firms this month are seeking knowledgeable technical analysts with moderate amounts of experience for roles across the globe. 1) Goldilocks Premium Research in Kolkata is looking to hire...
Association Updatesby Marie Penza
Membership The CMT Association would like to congratulate the following members on their new positions: Emile Mehanna, CMT, Deputy General Manager | Head of Advisory & Asset Management at Arab...
New Educational Content This Month
We have recently added an updated CMT Program Information Session to the video archives, which provides new details pertinent to the December 2021 exam administration. We’re excited to add Mike Hurley and more later this month.
In this month’s President’s Letter, I am going to address the professional work requirement for membership in the CMT Association.
Per the Bylaws, Article 2.01, Section (C), items (i) and (ii), an applicant for Membership must be employed as an investment professional as of the date of application and have at least three years of approved professional work experience. Furthermore, Article 2.02, Section (A), item (i) states that to be granted the CMT Charter, one must be a Member.
While the CMT Association has grown and evolved over the years, our mission – our “reason for being” – has not changed. Definitely, without question, we exist to promote the use of Technical Analysis. That is why the Association was originally formed and is the key reason we have remained relevant all these years.
But, our mission is not only to promote the use of Technical Analysis. There are two additional components, or facets, to our mission that are extremely important to understanding why we exist and what we aim to accomplish as a group.
- We aim to attract and retain a membership of professionals devoting their efforts to using and expanding the field of technical analysis and sharing their body of knowledge with their fellow members.
- We will establish, maintain, and encourage the highest standards of professional competence and ethics among technical analysts.
These three items – promote TA, have professional members, and maintain ethical standards – compose our mission statement. Importantly, the mission statement not only explains who we are and what we are about, but it also does a good job of defining what we do not aim to be.
Because computers have made it easy to perform Technical Analysis by instantly plotting indicators on the screen, Technical Analysis has become an extremely popular tool among individual investors, or “retail” investors, over the past 30 years or so. These are people who do not have careers in finance and typically manage their own pools of capital to augment other sources of income.
The CMT Association does not aim to be a source of educational content and networking opportunities for non-professional investors. Per our mission statement, we intentionally focus on serving financial professionals to help them successfully use Technical Analysis in their careers.
That being said, many people who are just learning about Technical Analysis for the first time may be thinking about a career in Finance because of their interest in TA and trading. Often, we are asked by CMT Program candidates how they may qualify for membership if they do not have the required minimum of three years of work experience in Finance. As they sometimes explain, the very reason they are pursuing the designation is to land a decent job in Finance. So, how can they attain job experience if they need the CMT designation to do so? It appears to be a similar conundrum as credit card companies requiring you to have a good credit history before they issue you a card, but without a card you cannot obtain a good credit history.
Like a post-graduate degree from a university (e.g., an MBA), a professional designation can certainly elevate one’s attractiveness to employers. Keeping in mind the well-defined mission of the CMT Association, our requirement that members have a minimum amount of professional financial work experience is necessary and we must be uncompromising in its application. The CMT designation proves to employers that you possess a thorough knowledge of Technical Analysis concepts and have a competent ability to apply them. But, it cannot be the only requirement of membership in the Association.
The unfortunate truth for CMT candidates who have yet to get a job in Finance is that you will need to wait to apply for membership until you can satisfy the work requirement. But remember, this does not require you have a job in trading or investing per se. Your work experience just has to be related to the field of Finance in some capacity. Alternatively, Affiliate Member status gets you access to the CMT Association’s educational programming, ethics awareness, and helps you build your network of TA professionals, but does not require work experience. For CMT Program candidates, Affiliate membership includes reduced pricing on CMT Exam registration.
I hope this helps clarify what might appear to be a confusing requirement for membership in the CMT Association.
Now, with that topic behind us, I want to recognize the contributions of the previous Editor of Technically Speaking, Michael Kahn. Mike is a Senior Market Analyst at the famed Lowry Research Corporation in North Palm Beach, Florida, which was previously owned and run by Paul Desmond, Past President of the CMT Association, a founder of AAPTA, and winner of the Charles H. Dow Award.
In case you did not know, Mike wrote for Barron’s and MarketWatch for many years and was (is) one of the shining stars of the CMT Association. I personally would use Mike’s articles to annoy coworkers about the usefulness of Technical Analysis, which generally went over very well. So, I sort of feel like we all owe Mike for being one of the faces of Technical Analysis out there proving to the world why we do this stuff. On top of that, he did a fantastic job producing our newsletter over the years.
I wish you the best of luck in your future endeavors, Mike. Thank you!
DXY trend: Looking at the trend of the US Dollar index (DXY) is very important to gauge the movement of Bullions and Base Metals, as these have an inverse relationship to this trend. While Bullions still account for other Geopolitical situations while factoring in the prices, Base Metals have a distinctly inverse relationship with the US Dollar index.
US Federal Bank’s Policy: In the last one and a half years, we saw the Dollar’s demise on the back of the US Federal Bank’s monetary policy. Weaker Dollar boosted base metal prices. In the wake of that, the US Dollar index seems to have taken greater support close to the level of 89.00 and has bounced back towards 93.73. In the September meeting of the US Fed, we got an indication that we could see tapering as well as a rise in interest rates on the back of economic recovery going forward. Thus, it becomes crucial to look at the DXY structure.
Elliott wave: The monthly chart of DXY marks the Elliott wave pattern. In the period from 2011 to 2017, prices rose from the lows near 74.00 to 103.85 levels. This price action exhibited impulsive behavior as marked by (1-2-3-4-5). This rise has completed the intermediate wave (A) of the Zigzag correction pattern and post that intermediate wave (B) is ongoing which is probably forming a ‘Triangle Pattern’ as indicated by the grey lines. This wave (B) has taken support close to the 50% retracement level of the prior rise.
US Dollar Index (DXY) Monthly chart:
Triangle Pattern: The structure of intermediate wave (B) suggests minor wave C has completed and wave D has started which is likely to move towards the black trendline resistance.
Bollinger Bands: DXY is on the verge of crossing above the main line (moving average) of the Bollinger Bands for the first time in 17 months. This indirectly suggests that prices are about to break above their average of the last 20 months.
MACD Positive crossover: We have marked the previous occasions when buy signals were generated in MACD. Most of the times in the past this signal worked out brilliantly, and now once again it has provided a bullish signal which supports our outlook.
Now let’s dig a little deeper and look into the weekly chart which shows the formation of the “Double Bottom Pattern”. There is more validity of this pattern as it has formed after a sustainable downtrend. Bollinger Bands have also started to tilt on the upside and prices have started to sustain above the middle band, which is a bullish sign. Now, any monthly close above 94.00 will lead to a breakout from this pattern and suggest a target towards 97.50 level.
US Dollar Index (DXY) Weekly chart:
In short, considering the shift in the US Federal bank’s monetary policy as well as the overall structure of DXY, the US Dollar index (DXY) has formed crucial lows at 89.00 levels and a break above 94.00 will provide further confirmation of the bullish scenario for the move towards 97.50 levels at least. Overall wave D target can be expected in the range of 101.50 -102.00 levels which is finally not a good sign for Base Metals as well as Bullions to some extent. This scenario will remain valid as long as the crucial support of 89.00 is protected.
I was asked to write an article on how we use charts in our investment selection process from the perspective of a hedge fund manager. The answer is, a majority of analysis comprises of fundamental analysis while technical barometers are used to assist with entry and exit timing. So here is how we use Technicals to identify our levels.
PHASE 1 – The Market:
On a technical basis, we start “top down” – with the general indices – to get a sense of whether it makes sense to be aggressively adding risk or lightening up. Since no single indicator or oscillator is foolproof, we try to look at a few dozen to see if they are pointing to the same probabilities – or diverging in their readings.
While many technical analysts prefer to buy when there is high relative strength and “blue skies” on “breakouts,” we prefer to buy high-quality durable franchises when they are on sale. We are looking for periods when selling is at or near exhaustion versus buying when everyone is already clamoring for the stock or sector. While this may require slightly more patience – as building bottoms can take time – if you have done proper fundamental analysis and know what you own (as well as understand the time value of money), buying quality (when trading below intrinsic value) and selling when the masses are exuberant for the company (after it has exceeded intrinsic value), is a process that has created material wealth for practitioners over many generations and through many cycles. Here are a handful of indicators we look at to get a feel for the general market:
PHASE 2 – Sector Rotation:
Once we have a feel for the general market climate, we drill down to see which sectors are on sale. When we have determined what is at/near selling exhaustion – we do deep-dive fundamental analysis to determine WHY. Sometimes stocks and sectors are cheap for a reason. We look to identify catalysts that will turn the tide in a reasonable amount of time. We use sector barometers like percent of stocks in a sector above their 20 and 50 day moving averages, Bullish Percent (by sector), and ratio charts of the sector relative to the general indices. Here are some barometers that we go through for each sector to identify potential opportunities:
PHASE 3 – Stock Selection:
After we have determined the climate of the general indices and identified sector(s) that may be offering the greatest opportunity, we run a simple “oversold” (relative strength) screen to see a few dozen large cap, high quality companies, in the targeted sector. Then the real work begins to find those franchises that are cheap for a reason (to avoid), or cheap due to sector rotation or some short-term bad news/exogenous event that has caused it to be misappraised in the short term:
Can technical analysis complement value investing? Yes, indeed.
Fundamental practitioners are often grouped into value or growth styles of investing, while within the technical community the corollary styles are momentum vs mean reversion. In Episode #10, we speak with Canada’s foremost market expert Larry Berman, CMT, CFA who shares a compelling perspective on using technical analysis tools to position his funds toward undervalued securities.
Dogmatic believers in any style can consider this quote from the episode:
“There is no right or wrong in what we do. It’s just how you do it.
And results are results.” – Larry M. Berman, CMT, CFA
Fill the Gap covers a lot of ground this month, including:
- How fund managers can think about risk and objective outside the box,
- Details on a multi-factor diffusion model that combines technical, fundamental, and cyclical factors
- The behavioral implications of questions like “is China investable?”
- Why “Thinking in Bets” is all any practitioner can do in a market of infinite uncertainties
Larry gives concrete examples of how to use a multi-timeframe perspective to locate mean reversion opportunities, and explains how technical analysis can help investors avoid “value traps.”
Mr. Berman appears weekly on BNN’s Berman’s Call where he blends fundamentals with expert technical analysis to help Bloomberg viewers uncover opportunities in the marketplace. He is a Co-Founder of ETF Capital Management and The Independent Investor Institute — an organization dedicated to providing unbiased education to Canadian investors. With nearly twenty-five years of investment industry experience, Larry is an accomplished money manager across the equity, commodity, foreign exchange, and fixed income markets.
To better understand the concepts covered and current market commentary, we recommend reviewing the supplemental resources accompanying this episode using this link: go.cmtassociation.org/ftge10
I started studying Technical Analysis back in 2000. My interest grew after the strong bull market of 1990s and the Tech bubble. At the time I was studying Economics, and the theory and real market behavior didn’t match. Something was off. I realized that the price action and the teachings of Technical Analysis made more sense to explain the irrational behavior of speculative markets.
I went through several methods in Technical Analysis, especially after enrolling for the CMT Program. I studied Elliott Wave, Indicators, Point & Figure charting, Candlesticks and Chart Patterns. It was not until 2007, when I started working for the National Bank of Abu Dhabi in UAE, that I picked up the book of Edwards & Magee Technical Analysis of Stock Trends and mastered it. I went through different methods & tools in the field and landed back on the most basic price analysis through the application of chart patterns.
Earlier I read Richard Schabacker as well. The methods of classical charting made so much sense and were practical as well, as I was managing sizable funds in the MENA region. I had to focus on so many securities that classical chart patterns came in handy. Technical Analysis of Stock Trends became a reference for me as I narrowed down the patterns I wanted to trade. With so many examples and clear classification of reversal and continuation type chart patterns, I think it is a must-read for all students of Technical Analysis. The difference between the two books is that in Richard Schabacker’s Technical Analysis of Stock Market Profits, the author discusses trading tactics around chart patterns in the second part of the book.
Given that it is one of the oldest methods of price analysis, there is still a lot of misconception about classical chart patterns and what qualifies as a H&S top, bottom or even H&S continuation. Yes, it is still widely discussed and challenged if H&S can form as a continuation pattern. Edwards & Magee is one of my favorite references when it comes to the concept of H&S continuation pattern. I come across a lot of H&S continuations and they have been profitable patterns. Edwards & Magee discussed the H&S continuation type with the example below.
The charts are so clearly drawn both on daily and weekly scale that they have been an inspiration for me to look out for such clear chart pattern developments. The example that they have provided is from 1936 on Anaconda Copper. Such old examples keep repeating in today’s markets as well. As I narrowed down the chart patterns that I’m interested in, I have come to the conclusion that the ones with clean horizontal boundaries are easier to trade as any breakout from those setups would clear the minor highs as well, leaving little resistance ahead of price action. From the H&S continuation type I try to focus on the ones that have symmetry between the left and right shoulders both on price and time. I also make sure the neckline is horizontal with several tests of the pattern boundary. The implications of an H&S continuation in an uptrend is the same as H&S bottom reversal. Price target measurement, volume pattern on shoulders and the head and the bullishness of the pattern are all the same for both the continuation and reversal type.
A recent example can be seen above on a single equity from Switzerland. I’ve featured and traded this pattern. The similarity between two patterns makes you wonder about the driving forces behind such price developments. I guess without questioning too much it is best to focus on the applicability of such patterns in today’s market and try to capture nice trend periods that emerge from such consolidations.
I keep looking for clean chart patterns and my guides are Richard Schabacker, Edwards & Magee, and Peter Brandt in the field of classical charting. If you have questions about this story or any other chart pattern developments in Global Markets, you can reach me at www.techcharts.net and at firstname.lastname@example.org.
New Educational Content This Month
November 18, 2021
Using An Institutional Mindset With Growth Investing
Presenter(s): Matthew Caruso, CFA, CMT
October 27, 2021
Tools, Process, & Communication: Technical Analysis for RIAs
Presenter(s): Trent Derrick, Tyler Wood
October 22, 2021
Systematic Multiple Time Frame Investing
Presenter(s): Bill Kelleher, CMT, CFA